Market participants across the board feel that the transactions taking place in the debt market are based on the Reserve Bank of India's (RBI) pronouncements on interest rates.
In other words, it is the central bank that moves the rate and not the market forces.
At a one-day debt seminar today hosted by Business Asia, while most speakers spoke of the need to widen the market by introducing a heterogeneous group of investors, Gangadhar Darbha, consultant for National Stock Exchange (NSE), lashed out at how the central bank is enforcing a uni-directional movement on interest rates.
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RBI general manager H R Khan, who chaired the session on 'Widening & deepening the debt market', was however quick to refute the allegations. "The market listens to what it wants to hear," Khan said.
"The market is going along as if there is infinite liquidity. The central bank has to be very circumspect in its pronouncements on interest rates," Darbha cautioned, as this can act as a potential threat to the market liquidity.
He pointed out that while the RBI's stance is for softening interest rates, the fiscal deficit is mounting and there is no movement to prune it down. "Without the government pruning down the fiscal deficit, the RBI does not have much leeway in being a controller," Darbha added.
Leading primary dealers agreed that at the end of the day that the market tends to move in a unilateral direction, dictated primarily by statements or hints made by the central bank. The debt market segment is not market driven as it seems to be projected.
Participants do not take a view on the future of interest rates, but simply take a view on the RBI. Correspondingly, trading in government securities and corporate bond is based on the stance taken by the central bank on the future of interest rates.
Also speaking at the one-day seminar ICICI Bank head of global markets N Balasubramanian stated the need to view liquidity in the context of outstanding volume. "While volumes are good today, cyclical studies show that when market reverses, volumes will fall," he pointed out.
India's turnover to outstanding stock ratio stands at five, which is considered to be high, said IDBI Capital Market Services managing director G V Nageswara Rao. However, he also pointed out that large transactions cannot be executed without large movements in prices.
"The lack of anonymity in trading on the negotiated trading system is the biggest problem faced by market participants," Rao said.